There are three important concepts in Week 3: (1) Profit analysis and Break even analysis; (2) Cost determination of medical services; (3) Charge setting of medical services. Our weekly discussions cover the above three parts of concepts. After completing the topic 1, I hope you will be more comfortable to work on Assessment #2.
1. Profit analysis and Break even analysis Chapter 5 of Gapenski’s book
1a.What is difference between fixed costs and variable costs? Define and give an example for each.
1b.What are the two primary differences between P&L statement and income statement?
1c.Complete the following P&L statement
Good Health Clinic: 2015 Projected P&L Statement (based on 65,000 patient visits)
Total revenue ($100 x 65,000) $ (A) Total variable costs ($30 x 65,000) (B) Total contribution margin ($ (C) x 65,000) $ (D) Fixed costs 4,000,000Profit $ (E)
1d.The P&L statement can be expressed as the equation:
Total revenues – Total variable costs – Fixed costs = Profit
(Unit charge x Volume) – (Unit variable cost x Volume) – Fixed costs = Profit
Using the information from the above P&L statement, what is the break-even point in volume?(Hint: no profit at break-even.)
1e.Break-even point in dollar indicates the revenue level one has to reach to break-even, which is equal to the revenue gained if the break-even point in volume is achieved. Based on the previous question, what is the break-even point in dollar? (Relationship of Costs to Volume and Revenue Chapter 6 of Nowicki’s book)
1f. Check out Table 5.8from Gapenski’s book for another P&L Statement. Why does it have additional lines of revenues compared with the one for Good Health Clinic?
1g.Compare the P&L statement atTable 5.10 with the one for Good Health Clinic. What is the difference in estimating revenue? Based on Table 5.10, can the clinic receive more revenues by providing more clinic visits?
2. Cost allocation and determination: Chapter 6 of Nowicki’s book
2a.List two departments/units in a healthcare organization that can be considered as revenue centers. List two departments/units that can only be cost centers but not revenue centers.
2b.Define two of cost allocation methods and List at least one advantage and one disadvantage for each.
2c.What is “cost driver”? A manager in a hospital needs to allocate housekeeping costs to other departments. Can you suggest a cost driver and provide your reason?
3. Setting Charges: Chapter 7 of Nowicki’s book: Explain the following methods of setting charges: RVU method, hourly rate method, and surcharge method. For EACH method, provide one department in a healthcare organization as an example that would use this method.